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Intel Capital, the venture capital arm of chip giant Intel Corp., led Virtual Iron Software Inc.'s latest financing round to secure US$8.5 million in funding for the virtualization software startup, the two companies announced Monday. In addition, Virtual Iron and Intel Corp. have signed a non-exclusive collaboration agreement.

The financing in the form of Series C funding comes from new investor Intel Capital as well as existing investors The Goldman Sachs Group Inc., Highland Capital Partners Inc. and Matrix Management Corp.'s Matrix Partners.

This isn't the first time Intel has invested and partnered with a virtualization software company. The chip giant and Intel Capital announced a similar arrangement with SWsoft Inc., the maker of Virtuozzo server virtualization software, in June.

Virtual Iron previously raised a total of $20 million in its Series A and B funding rounds in 2003 and 2004 respectively.

To date, Virtual Iron has only used a fraction of the money it has raised. "We've been extremely cash efficient and have spent the majority on product development," said Mike Grandinetti, chief marketing officer at Virtual Iron, in a phone interview Friday.

Virtual Iron intends to use the money to further develop its VFe virtualization software as well as hire more engineers and marketing staff and build a sales organization, according to Grandinetti. The firm employs 51 staff, but recently leased 28,000 square feet of office space in Lowell, Massachusetts, where Virtual Iron, currently based in Acton, Massachusetts, will shortly relocate its headquarters, he said.

Previously known as Katana Technology, the company was founded in March 2003 by Scott Davis and Alex Vasilevsky. The firm unveiled its new name, Virtual Iron, in January of this year and previewed its VFe software in February.

VFe currently runs on Linux operating systems from Red Hat Inc. and Novell Inc., but Virtual Iron is also planning to release a Windows version of its software in the middle of next year, according to Grandinetti.

Virtual Iron differentiates itself from other players in the virtualization market by offering software that can manage a datacenter's server, storage and network virtualization, Grandinetti said. "What we're doing is why Intel's so compelled to work with us because we truly provide data center virtualization," he added.

The collaboration agreement with Intel is giving Virtual Iron insight into the chip giant's product roadmap as well as early access to its technologies including Intel Virtualization Technology (VT), according to Grandinetti. "There's also the sheer marketing muscle Intel brings to the marketplace," he said.

However, he stressed that Virtual Iron positions itself as "completely agnostic" when it comes to what chips, servers or software customers are using. The company already works with Intel rival Advanced Micro Devices Inc. (AMD) and Grandinetti said Virtual Iron expects to announce a more formal partnership with AMD at some point in the future.

Virtual Iron has also been working to enable users of its software to manage other virtualization environments in the server space, namely open-source Xen and community-sourced ESX Server from EMC Corp.'s VMware subsidiary, Grandinetti said.

Grandinetti pointed out the company's Series C funding also includes the option to raise an additional $2 million with a strategic go-to-market partner, a way for the startup to more aggressively market and sell its software.

Virtual Iron has six customers for its software so far drawn from financial services, manufacturing and federal government, according to Grandinetti.

As part of its investment, Lucy McQuilken, an Intel Capital investment manager, will take an observer's seat on Virtual Iron's board of directors. As an observer, McQuilken can sit in on board meetings but doesn't have a vote.

Although in the past Intel Capital only occasionally led rounds of funding, the organization is planning to do more in future, McQuilken said in a phone interview Friday. Any investment Intel Capital leads is by its nature a very strategic one, she noted.